Mortgage Insurance for the Texas Exam: PMI, MIP, VA Fee

Mortgage insurance is a small topic with one big trap: candidates assume it protects the buyer. It does not. It protects the lender. Get that straight, and the rest is just matching each loan type to its insurance. This spoke deepens a point from the types of mortgages and loans pillar.

Low-down-payment programs often use insurance or a guarantee fee because a smaller equity cushion increases lender risk. The name, conditions, and duration differ by program.

What is mortgage insurance, and who does it protect?

Mortgage insurance protects the lender, not the borrower, against loss if the borrower defaults. It is commonly required when the down payment is small, because less equity means more risk. The borrower pays for it, but the coverage benefits the lender. This is the single most tested point about mortgage insurance, so do not confuse it with insurance that protects the homeowner.

Here is the core idea, and the exam tests it directly. Mortgage insurance is paid by the borrower but protects the lender. If the borrower defaults and the property sells for less than the loan balance, the insurance covers the lender's loss.

Conventional lenders commonly require borrower-paid PMI when the original LTV is above 80 percent, but the loan terms, lender, and insurer control whether and how coverage applies. The exam shortcut is "less than 20 percent down," not a promise that every higher-LTV loan uses identical PMI. Do not confuse PMI with homeowners insurance, which protects the owner's property, or with title insurance, which protects against title defects.

PMI on conventional loans

Private mortgage insurance, or PMI, is commonly associated with conventional loans above 80 percent LTV. The borrower can request cancellation at the scheduled 80 percent point if federal conditions are satisfied. Automatic termination generally occurs at the scheduled 78 percent point if the borrower is current.

PMI is the conventional-loan version. When a conventional borrower puts down less than 20 percent, meaning the loan exceeds 80 percent of value, a lender commonly requires private mortgage insurance, often added to the monthly payment.

Under the federal Homeowners Protection Act, two scheduled thresholds matter. The borrower may request cancellation on the date the principal balance is scheduled to reach 80 percent of original value if the borrower submits a written request, has a good payment history, is current, meets the lender's reasonable evidence requirement that the property value has not declined, and certifies that no junior lien exists. Automatic termination generally occurs when the balance is first scheduled to reach 78 percent of original value if the borrower is current. A midpoint rule also provides a backstop. These are federal baselines for covered loans, not a promise that every loan follows identical facts.

MIP on FHA loans

FHA loans carry a mortgage insurance premium, or MIP, with upfront and annual components under current program rules. Duration is the key contrast with PMI. For FHA case numbers assigned on or after June 3, 2013, annual MIP generally continues for the mortgage term when the original LTV is above 90 percent. At an original LTV of 90 percent or less, the period is generally 11 years. Mortgage term and program details still matter.

FHA loans use MIP instead of PMI, and it works differently. Most FHA-insured forward mortgages have two pieces. An upfront premium is charged at closing and may be financed, while an annual premium is collected through monthly payments. Do not turn that exam pattern into a statement that every FHA product or transaction follows identical MIP rules.

The exam often shortens this to less than 10 percent down versus at least 10 percent down. Original LTV is the precise measure, and loan term also matters. Unlike conventional PMI, FHA MIP does not automatically end merely because the current balance later reaches 78 or 80 percent of original value.

The VA funding fee

VA loans do not charge monthly mortgage insurance. A one-time VA funding fee may apply and can generally be financed into the loan. The amount depends on the transaction, first or later use, and down payment, and qualifying borrowers are exempt.

The VA loan handles this differently and more favorably. There is no monthly mortgage insurance at all. In its place, the borrower pays a one-time VA funding fee, a percentage of the loan amount that can be rolled into the financing rather than paid in cash.

The fee varies by loan type, first or later use, and down payment, and federal law provides exemptions for qualifying borrowers. Exact percentages and eligibility details can change. The stable exam distinction is no monthly mortgage insurance and a one-time funding fee that may apply.

The USDA guarantee fee

USDA guaranteed loans do not use conventional PMI. Current program rules use an upfront guarantee fee and an annual fee. Pair USDA with eligible rural property, income and occupancy requirements, and the program's guarantee fees.

USDA loans round out the set. Like the others with little or no down payment, they need a form of insurance, which USDA calls a guarantee fee. It comes in two parts, an upfront fee added to the loan and a smaller annual fee collected monthly.

For the exam, the program match matters more than memorizing a current percentage. Do not make an unsupported promise that one program is always cheaper over the life of a loan.

Comparing the four programs

Conventional loans can use PMI at higher LTV. FHA loans use MIP with upfront and annual components. VA loans have no monthly mortgage insurance and may use a funding fee. USDA guaranteed loans use guarantee fees. These structures protect or compensate the lender or guarantor for program risk.

Lay the four side by side, and the pattern is clear.

The differences are in the form, eligibility, pricing, and removal or duration rules. Do not apply conventional PMI cancellation rules to FHA MIP.

Hazard insurance and flood insurance are different

Pearson places hazard insurance and flood insurance in the same lender-requirements row as PMI and MIP, but they protect against different risks. Hazard or homeowners insurance covers listed property losses and helps protect the lender's collateral. Flood insurance covers flood risk, which a standard homeowners policy ordinarily excludes.

Federal mandatory-purchase rules generally require flood insurance for a regulated loan secured by improved real property or a mobile home in a Special Flood Hazard Area when National Flood Insurance Program coverage is available. PMI, MIP, and guarantee fees do not replace hazard or flood coverage.

How to study mortgage insurance for the exam

Anchor mortgage insurance on one fact: it protects the lender, not the borrower. Then match each program to its structure and distinguish mortgage insurance from hazard and flood coverage. Learn the PMI thresholds with their conditions and the FHA MIP duration rule with original LTV and mortgage term.

Start with the protects-the-lender fact. Then attach each loan program to its insurance form and learn the conditional PMI distinction: request at scheduled 80 percent, automatic termination generally at scheduled 78 percent.

Tie this spoke to its neighbors. The types of mortgages and loans pillar introduces the programs, the loan-to-value and down payment guide drills the equity math behind cancellation, and the Closing Disclosure and TRID spoke shows where these costs appear at closing.

Frequently asked questions

Does mortgage insurance protect the buyer? No. Mortgage insurance protects the lender against loss if the borrower defaults. The borrower pays for it, but the coverage benefits the lender. This is the most common misconception and the most tested point. It is different from homeowners insurance, which protects the property, and title insurance, which protects against title defects.

When can PMI be removed from a conventional loan? The borrower may request cancellation at the scheduled 80 percent date if the federal conditions are met, including a written request, current payments, good payment history, no junior lien, and required evidence that value has not declined. Automatic termination generally occurs at the scheduled 78 percent date if the borrower is current. A midpoint rule also applies.

Why does FHA MIP sometimes last the whole loan? Because FHA uses original LTV and mortgage term. For many current FHA loans above 90 percent original LTV, annual MIP continues for the mortgage term or 30 years, whichever occurs first. At 90 percent original LTV or less, the period is generally 11 years or the mortgage term, whichever occurs first.

Do VA loans have monthly mortgage insurance? No. VA-backed loans have no monthly mortgage insurance. A one-time funding fee may apply and can often be financed. The amount varies, and exemptions exist for qualifying borrowers.

Practice questions

1. A buyer asks whether the PMI on their conventional loan will protect them if they lose their job and default. The best answer is: A. Yes, PMI covers the borrower's payments B. No, PMI protects the lender, not the borrower C. Yes, PMI pays off the loan for the borrower D. No, but only because this is a conventional loan

Answer: B. Mortgage insurance protects the lender against loss on default, not the borrower. The borrower pays for it, but it does not cover their payments or pay off their loan (A and C). This is true for PMI regardless of loan type (D).

2. For a covered conventional loan, the borrower is current when the scheduled balance reaches a federal automatic-termination threshold. What is that threshold? A. 90 percent of the original value B. 80 percent of the original value C. 78 percent of the original value D. 50 percent of the original value

Answer: C. Under the Homeowners Protection Act, a servicer generally must automatically terminate PMI on the date the balance is scheduled to reach 78 percent of original value if the borrower is current. Borrower-requested cancellation may be available earlier at 80 percent if the statutory conditions are met. FHA, VA, lender-paid mortgage insurance, and other excluded arrangements follow different rules.

3. A buyer obtains a 30-year FHA loan with an original LTV above 90 percent. Under the current duration schedule, what happens to annual MIP? A. It cancels automatically at 78 percent B. It lasts the life of the loan C. It is waived entirely D. It can be removed after 2 years

Answer: B. For this 30-year loan above 90 percent original LTV, annual MIP continues for the mortgage term. The general HUD schedule is the mortgage term or 30 years, whichever occurs first. The 78 percent automatic rule belongs to covered conventional PMI.

4. Which statement about VA loans is correct? A. They charge monthly mortgage insurance like FHA B. They charge a one-time funding fee and no monthly insurance C. They require PMI until 20 percent equity D. They never charge any fee to any borrower

Answer: B. VA loans have no monthly mortgage insurance and may charge a one-time funding fee that can be financed. They do not use FHA MIP or conventional PMI, and qualifying borrowers are exempt from the fee.

Sources and methodology

This guide was reverified against current CFPB, HUD, VA, and USDA primary sources on August 12, 2026. Insurance rates and fees can change, so confirm any number before quoting it to a client.

• The core principle that mortgage insurance protects the lender, and that it is required for low-down-payment loans, comes from standard mortgage lending practice and lender guidance.
• The PMI cancellation thresholds, request at 80 percent and automatic termination at 78 percent, plus the midpoint backstop, come from the federal Homeowners Protection Act of 1998.
• The FHA MIP structure and duration schedule come from HUD guidance for case numbers assigned on or after June 3, 2013; the schedule uses original LTV and mortgage term, not later equity.
• The VA one-time funding fee, its variation by use and down payment, and the disability waiver come from VA loan guidance. The USDA two-part guarantee fee comes from USDA Rural Development.

Verify all mortgage insurance rates, fees, and cancellation rules against the current agency sources before you rely on them in practice.

Official source links

• CFPB, Homeowners Protection Act and PMI Cancellation
• CFPB, When can I remove PMI?
• HUD, FHA Handbook 4000.1
• VA, Funding Fee
• USDA, Single Family Housing Guaranteed Loan Program
• FDIC, Flood Insurance Mandatory Purchase Requirements

This article is exam-prep education for the Texas real estate sales agent license. It is not lending, financial, or legal advice, and it does not create an agency relationship. Mortgage insurance rates, fees, and cancellation rules change and depend on the borrower and loan. Always confirm the current CFPB, HUD, VA, and USDA sources and work under the supervision of your sponsoring broker before acting.